A defining characteristic of minimum volatility (or min vol) portfolios is that they seek to help smooth out the market’s peaks and valleys by holding low beta stocks — stocks that don’t typically exhibit excessive amounts of volatility compared with the broader market.
After I explain this to clients, I inevitably get asked this question: “How does this low-beta effect behave over time?”
It’s a fair question. Unlike a typical cap-weighted benchmark or other well-known “market effects” such as value and momentum, there are no “live” indices or funds to look at for a quick answer. We can, however, get a flavor for the behavior of the low-beta effect with a simple experiment.
As I’ve explained in previous blog posts, a min vol portfolio tends to overweight low beta securities compared with a typical cap-weighted portfolio. So, let’s look at how low-beta stocks have performed over time.
To conduct this simple experiment, I looked at the stocks in the S&P 500 index and calculated their betas to the market every month since 1959. Why 1959? That is the first full year of the S&P 500 index, making the return of each of these stocks straightforward to collect and easy to compare with the overall return of the market. In addition, I broke out the time periods 1980-2011 and 2001-2011 to get a view of more recent periods in the data.